Name of The Project Guide: Submitted To

A PROJECT REPORT ON
RBI DURING THE TENURE OF RAGHURAM RAJAN & URJIT

PATEL
SUBMITTED BY
SAHIL DEEPAK SURVE
T.Y.B.M.S [SEMESTER VI]

Name of the Project Guide
Prof. SOUMIK CHATTAPADHYAY

SUBMITTED TO
MSG-SGKM College of Arts, Science & Commerce, Ghatkopar (E)
UNIVERSITY OF MUMBAI
ACADEMIC YEAR “2018- 2019”
MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 1

CERTIFICATE
This is to certify that Mr. SAHIL DEEPAK SURVE
Roll No. 41655

of BMS (Bachelor of Management Studies) studying in VIth Semester,
has undertaken and completed the project work titled, “RBI DURING
THE TENURE OF RAGHURAM RAJAN & URJIT PATEL”
during the academic year 2018 - 2019.
The project was completed successfully under the guidance of

Prof. SOUMIK CHATTAPADHYAY
This is bonafide project. The said work and information presented in

it is true and original to the best of our knowledge and belief.
__________________________
________________________
Signature of Course Coordinator Signature of I /C
Principal
__________________________
________________________
Signature of Project Guide Signature of External
Examiner

DECLARATION
I, Mr./ SAHIL DEEPAK SURVE
of MSG-SGKM College of Arts, Science & Commerce, studying in

T.Y.BMS (SEMESTER VI) hereby declare that I have completed my
project, titled “RBI DURING THE TENURE OF RAGHURAM
RAJAN & URJIT PATEL” in the academic year 2018 - 2019.
Wherever the information have been taken from any book or other
sources the same have been mentioned in references.
The information submitted herein is true and original to the best of my

knowledge.
Student’s Signature
[Roll No.41655 ]

ACKNOWLEDGEMENT
I have a great pleasure in preparing my project report on “RBI

DURING THE TENURE OF RAGHURAM RAJAN & URJIT
PATEL”
I sincerely thank with deep sense of gratitude to Prof. SOUMIK
CHATTAPADHYAY, our guide for his / her kind co-operation for the
fulfilment of this project.
I am highly indebted to our honourable principal who took keen interest

and allowed us to perform this project.
I would like to thank our seniors, librarians who sincerely helped me

getting this information and last but not the least, sincere thanks to
college for a big reason that I am here in front of you presenting this
project.
…..….………………
Student’s Signature
[Roll No. 41655 ]

INDEX
1. Banker’s Bank (Summary) 6
2. History 8
3. Global Recession & RBI(2007) 11
4. RBI & Basel Norms 20
5. Raghuram Rajan’s Tenure & India’s Position 22
6. When Rajan proved Alan Greenspan wrong 24
7. Has Financial Developments made the world riskier? 26
8. Fighting Inflation 28
9. Monetary Policy Committee 29
10. Banking Sector Reforms 31
11. NPA restructuring 33
12. Rajan on NPA’s & his steps 35
13. CRR , SLR , Repo rate & Reverse repo rate 38
14. Rajan’s decesion on key indicator rates 40
15. Demonetisation was not a good idea : Rajan 43
16. Urjit Patel takes charge 44
17. The Big Boom : Demonetisation 46
18. Demonetisation : A proven failure? 47
19. RBI’s Autonomy & Government 49
20. Shall RBI’s excess reserve used to meet government fiscal deficit? 51
21. Economic Capital Framework 54
22. IL&FS crisis 57
23. The PNB scam & RBI 62
24. Recapitalization of Banks 65
25. Urjit Patel’s decesion on key indicators 70
26. Research Methodology 72
27. Data Analysis & Interpretation 73
28. Conclusion 77
29. Bibliography 79

THE BANKER’S BANK (SUMMARY)
The Reserve Bank of India (RBI) is the apex bank in India. It is the apex body regulating the
country’s monetary and banking system . It was formed in accordance with the Reserve Bank of
India Act 1934 and commenced its operations from 1 April 1935.The Governor being the head of
RBI controls all its functions .The projects covers a deep analysis of RBI during the tenure of the
two Governors Raghuram Rajan and Urjit Patel. It covers the steps taken by both the Governors
and its effects on the economy. India was one of the fragile five economies in the world in 2013
where rupee was in free fall , inflation was high , a large current deficit and foreign exchange
reserves were falling. Raghuram Rajan took charge in September 2013 as the Governor of RBI.
The project speaks of what steps both Governors took in each of their tenure to take India to
world’s 6th largest economy.Urjit Patel also had a well recognized work during his tenure.The
international pressure during Urjit Patel’s tenure ; also the China –USA trade war and also the
rising crude oil prices and how RBI sustained the economy during the tenure.The project covers
what both governors bought changes in the institution during their tenures. The changes in the
banking sector , the bank rates , the foreign yield , the banking norms and changes within them
covers the whole project. Also, a comparison of both the governors ; their progress and work and
how it affected the Indian economy .

OBJECTIVE
The main objective of this project is to provide detailed information about RBI especially during
the tenure of Raghuram Rajan & Urjit Patel. The project gives detailed information what both the
governors felt necessary during their tenure to take necessary steps during various situations
while heading the apex institution of India. Also a deep comparision of the work done by both
the governors during their respective tenures.
SCOPE
The scope of the project is it covers all the aspects of RBI ; right from its history to the norms the
institution works on. Also the project provides information on the steps by both the governors
during various crisis and situation. The project also covers the repo rates and inflation rates right
from 13 September 2013 when Rajan took charge till the end of Urjit Patel’s tenure in 2018.
Also the various banking reforms , the inflation fight , npa restructuring . The various crisis in
the bankong sector right from PNB scam to the IL&FS crisis and what the governor took steps
to tackle the problems. The graphical data of repo rates , inflation rates , price of rupees against
USD , npa’s and the overall economy growth during both their tenures. Also it provides detailed
information on the RBI’s internal issues regarding the RBI’s excess reserve which the
government needs to overcome its fiscal deficit and also the Section 7 of RBI which gives
government the right to interfere in the RBI’s decesion which is not allowing RBI to have that
amount of freedom in their work.The PM’s decesion of demonetisation and how RBI tackled the
overflooded requirement of currency in India. Also what steps where taken by RBI for ensuring
the needs of the peoples during the illiquidity shock.
LIMITATIONS
The data regarding RBI’s governor and what work they performed during their tenures was not
easily available. Also , I could not put down what was the real intention of both the governors
while taking actions on each steps. The data available is factual and what was real intention
behind cutting of the repo rates or increasing could not been put down in the project.
Also limited scope while receiving information. Exact data could not be fond of for the project.

HISTORY
The period 1935 when RBI was formed was when country’s where in process of
strengthening their economies from the effects of World War I. India, too, was in bad stage. So
,the Hiton Young Commission was formed . It presented its report “THE PROBLEM OF
RUPEE” .The central bank was then formed through guidelines presented by central legislative
and working style presented by Dr. Babasaheb Ambedkar. The original seal of RBI as
prescribed by the East India Company was “Double Mohur”. However , it was replaced with the
national animal of India and a Palm tree. Its functions were to regulate the issue of rupee
currency , keep reserves to secure monetary stability in India and to operate credit system in
India. Its central office was established in Kolkata and then shifted to Mumbai. It’s regulations
extended upto Myanmmar until and 1947. Also , before partition Pakistan was under its
regulation. RBI was formed through stakeholders , but , in 1949 it was nationalized. The RBI is
fully owned by the Government Of India.
In 1950 , Prime Minister Jawaharlal Nehru and its cabinet developed a economic policy
that focused on agricultural sector and the Banking Regulation Act was formed
In 1961 , as a result of bank crashes the RBI was requested to form a deposit insurance
system. The failure of Laxmi Bank and Palai central bank had a huge impact on depositors who
deposited their savings in banks for security. India was the 2nd country in the world in 1962
introducing Deposit Insurance Scheme after USA in 1933.
In 1969 , PM Indira Gandhi took a big step nationalizing 14 commercial banks with
deposits above Rs.50 crores.
1st wave of nationalization (1969)
 Central Bank of India

 Bank of Maharashtra
 Dena Bank
 Punjab National Bank
 Syndicate Bank
 Canara Bank
 Indian Bank
 Indian Overseas Bank

 Bank of Baroda
 Union Bank
 Allahabad Bank
 United Bank of India
 UCO Bank
 Bank Of India
2nd wave of nationalization (1980)
 Oriental Bank of India

 Corporation Bank
 Andhara Bank
 Punjab & Sindh Bank
 Vijaya Bank
 New Bank of India
In 1991 , as rupee lost 18% against dollar. For this the
Narshiman committee I was formed. It recommended
1.It recommended that interest rates not to be regulated by government. The interest rates must
be liberalized i.e the banks shall decide the interest rates. Although ,in 2010 , base rate was
introduced.
2. Priority sector lending was quashed. Loans cannot be disbursed to a particular sector only.
3. Branch expansion policy and financial inclusion must be given priority. According to this
policy , banks opening new branches must open 25% of its branches in rural areas and remaining
75% in urban areas.
4. Privates banks were given license in 3 stages in order to increase competition among banks.
ICICI , HDFC , AXIS (UTI),
IDBI , INDUS bank were given lisence in 1 st stage.
5. The Non-Banking Financial Company Framework was formed.

In 1998 , the Narshiman Committee II was formed. The recommendations bought
numerous changes in India’s banking sector. It recommended
1. Payment & Settlement Act for online banking was passed in parliament.
2. Real Time Gross Settlement (RTGS) was formed for traders with big amount for payment.
3. Permit license for new banks. Kotak Mahindra & Yes Bank were given license.
In 1999 , the Foreign Exchange Management Act was passed. It bought changes in law relating
to foreign trading and payments and promoting the orderly development of foreingn exchange.
By 2000’s , RBI was given full autonomy for regulating the banks. Changes were been
brought in the overall structure of RBI. RBI started focusing on financial inclusion
by providing credits , stabling the double digit inflation and the money flow in the country.

THE GLOBAL RECESSION & RBI (2008)
The Sub Prime Mortgage Crisis in USA had a huge on the Indian economy. RBI had a
big role in stabilizing the overall effects in India from the crisis. The international
transmission of liquidity shocks was fast and unprecedented. While falling asset prices and
uncertainty about valuation of the traded instruments affected market liquidity, failure of
leading global financial institutions and the deleveraging process tightened the market for
funding liquidity. In the first half of 2008 , the world experienced increase in food and
commodities prices.RBI had a big challenge has there was no foreign capital inflows and
international markets were still stabalizing. People started withdrawing their funds from
equity markets. Although, it had less effect on banking sector in India as banks were not
exposed to the subprime assets.But , the country’s capital inflow was reducing.But ,
industrial sector saw a big fallback and had a huge impact.
But, RBI had a dovish stance during global recession. The Repo Rate was reduced to
4.25% from 4.75%. The Reverse Repo rate was reduced to 2.75% from 3.25%. The Cash
Reserve Rate was reduced to 4% from 5%.
The exports & imports with USA saw no changes. USA being the largest trading partner of India
after China had a total trade 47 million USD . India exports in those period saw increase from 14
million USD in 2007 to 17 million USD in 2008.The main problem was the the double digit
inflation and the Foreign Direct Investments and liquidity. It was Raghuram Rajan who bought
the double digit inflation to single digit i.e 10.5% in 2008 to 5.8% in 2014 .To increase the
foreign market investments the automatic route was given more freedom in terms of rules &
regulations.
Indeed , the global recession did not affect India at that high levels as the western countries
were hit . India had less investments and stakes in the USA , which left India unaffected at a high
level.
Raghuram Rajan while working at International Monetary Fund (IMF) had produced his
papers on the fate of increasing credit risks in USA. The documents contained a detailed
information on how mortgage loans in USA would hit the economy. But , indeed, the documents
in 2005 were neglected by the IMF and remained it the cupboards. Raghuram Rajan had
predicted the biggest recession of all times in history well before in advance. Former U.S.
Treasury Secretary Lawrence Summers called the warnings as "misguided".

BASEL NORMS
In 1988 , a deliberation by all the central bankers around the world formed Basel
Committee on Banking Supervision (BCBS) in Basel , Switzerland published a set of minimum
capital requirements for banks. It was known as Basel Accord 1988 which was enforced by G-10
countries.
Basel I, that is, the 1988 Basel Accord, is primarily focused on credit risk and
appropriate risk weighting of assets. Assets of banks were classified and grouped in five
categories according to credit risk, carrying risk weights of 0% (for example cash, bullion home
country debt like Treasuries), 20% (securitisations such as (MBS) with the highest AAA rating),
50% (municipal revenue bonds, residential mortgages), 100% (for example, most corporate
debt), and some assets given No rating. Banks with an international presence are required to hold
capital equal to 8% of their risk-weighted assets (RWA).
The Basel II Accord was published initially in June 2004 and was intended to amend
international banking standards that controlled how much capital banks were required to hold to
guard against the financial and operational risks banks face. These regulations aimed to ensure
that the more significant the risk a bank is exposed to, the greater the amount of capital the bank
needs to hold to safeguard its solvency and overall economic stability. Basel II attempted to
accomplish this by establishing risk and capital management requirements to ensure that a bank
has adequate capital for the risk the bank exposes itself to through its lending, investment and
trading activities.
Basel III was agreed upon by the members of the Basel Committee on Banking
Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015. The
Basel III standard aims to strengthen the requirements from the Basel II standard on bank's
minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and
funding stability, thereby seeking to mitigate the risk of a run on the bank. The Basel III standard
aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios.
In addition, it introduces requirements on liquid asset holdings and funding stability, thereby
seeking to mitigate the risk of a run on the bank. This third installment of the Basel Accords was
developed in response to the deficiencies in financial regulation revealed by the financial crisis
of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity
and decreasing bank leverage.

Banking system is the backbone of any nation’s economy. For an economy to
remain healthy and going, it is important that the banking system grows fast and yet be stable.
This catches the biggest dilemma of policymakers. How to achieve both the objectives
simultaneously?
Over a period of time, several indicators have been developed which gauge the
depth and stability of the banking system. Examples can be Non-performing assets, Capital
adequacy ratio (CAR) etc.
Similarly, mechanisms to ensure their stability have also been developed. Some of
the examples can be CRR; SLR; Basel conventions; regular directions of the RBI; Financial
Stability and Development Council etc.
In this section, we will talk about some of these indicators and mechanisms. They
have also been in news for quite some time – Basel III norms and Non-Performing assets
(NPAs).
We will try to first clarify the related concepts; then understand the seriousness of the issue;
gauge their impact on the Indian economy and then offer some possible solutions as well as look
into some of the committee’s reports which have examined the matter.
About Basel norms
Basel is a city in Switzerland which is also the headquarters of Bureau of International

Settlement (BIS). BIS fosters co-operation among central banks with a common goal of financial
stability and common standards of banking regulations. Currently there are 27 member nations
in the committee.
Basel guidelines refer to broad supervisory standards formulated by this group of central banks-
called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the
BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord.
The purpose of the accord is to ensure that financial institutions have enough capital on account
to meet obligations and absorb unexpected losses. India has accepted Basel accords for the
banking system.

So, if the Basel norms are banking standards, then who has the authority to
make them? Are they mandatory for every country?
As said earlier, the Basel Committee makes these norms. The Committee’s decisions have no
legal force. Rather, the Committee formulates supervisory standards and guidelines and
recommends statements of best practice in the expectation that individual national authorities
will implement them. In this way, the Committee encourages convergence towards common
standards and monitors their implementation, but without attempting detailed harmonisation of
member countries’ supervisory approaches.
So, India can either accept them or reject them depending on the kind of financial system it
wants. So far, we have implemented or wished to implement all Basel norms.
Basel I
In 1988, BCBS introduced capital measurement system called Basel capital accord,
also called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of
risk weights for banks. Naturally if the capital with the banks is adequate to cover the risks ( e.g.
a power plant) they have invested in, then the bank is safe.
The minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means
assets with different risk profiles. For example, an asset backed by collateral would carry lesser
risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines
in 1999. The Basel norms are set up by the Basel committee on Banking supervision.
It is important to understand that the Basel accords have been the result of
cooperation by the countries over the years.
But why cooperate between member countries when banks operate within national
boundaries?It is because these banks lend not only to its country men but also other nations.
Also, private investors and sovereign nations take loans from banks across other nations. Further,
the financial system of the world is so interconnected that one incident of a banking collapse has
its repercussions all over the world. There can be no better example that the 2008 Global
recession. Therefore, global
cooperation on banking matters is a absolute necessity in today’s world. And, not only
cooperation but also adoption of some uniform standards is also important.

Again, Why uniform standards?
Bankers and investors invest over the world preferably in markets where they get best
returns. The markets will give returns only when the economy is stable. And, economy will be
stable only when the banking system is stable. Hence, it is important for investors and agencies
to measure the stability of the banking system. If all the nations adopt different standards, then
calculating stability figures will be a big headache for investors.
Also, suppose some nations run banks on better standards i.e. better risk management, better
returns, lower exposure to volatile markets etc., then they have a better chance of getting foreign
investment. But, if all nations adopt uniform standards, then at least the investors can be attracted
by only the strength of the economy.
Hence, it is important to have uniform standards especially when it comes to the
banking system which is so complex and vast. The Basel norms try to achieve exactly the same.
Till date three different Basel accords ( or norms) have come – each with a better safeguard than
the next one.
Basel II
In 2004, Basel II guidelines were published by BCBS, which were considered

to be the refined and reformed versions of Basel I accord. The guidelines were
based on three parameters.
1. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets,
In India, such a practice is equivalent to maintaining a Capital Adequacy ratio (CAR).
2. Banks were needed to develop and use better risk management techniques in monitoring and
managing all the three types of risks that is credit and increased disclosure requirements.
Increased disclosure requirements raise the confidence of investors and depositors in the bank.
The more transparent a bank is, the more stable it is deemed to be.
3. Banks need to mandatorily disclose their risk exposure, etc to the central bank.
This is important so that the central bank (RBI in India) is aware of the risks that the banking
system is going through.
There is a practice in India to publish bi-annual Financial Stability reports by the RBI. The latest
report published recently is of June 2014. Basel II norms in India and overseas are yet to be fully
implemented.

You will find some technical words like risk exposure etc. in the text. We do not need to go into
details. We only need to know their general meaning.
Basel III
In 2010, Basel III guidelines were released. These guidelines were introduced in response to the
financial crisis of 2008. A need was felt to further strengthen the system as banks in the
developed economies were under-capitalized, over-leveraged and had a greater reliance on short-
term funding. Too much short-term funding makes the banks prone to risks. Banks generally rely
on short-term funding because it is profitable.
Also the quantity and quality of capital under Basel II were deemed insufficient to contain any
further risk. This was because the banking system was growing. The world economy was
growing too. Hence, what is sufficient earlier was not sufficient now.
Basel III norms aim at making most banking activities such as their trading book activities more
capital-intensive. The guidelines aim to promote a more resilient banking system by focusing on
four vital banking parameters viz. capital, leverage, funding and liquidity.Again we need not go
in technicalities, just the broad picture.
This is how it was broadly done.
Capital
The capital requirement (as weighed for risky assets) for Banks was more than doubled. ( e.g.
4.5% from 2% in Basel-II accord for common equity)
Leverage
Leverage basically means buying assets with borrowed money to multiply the gain. The
underlying belief is that the asset will return the investor more than the interest he has to pay on
the loan. Obviously doing so is risky business. Thus the Basel III puts a limit on the banks for
doing this. The numbers are not important here. Getting the concept is important.

Funding and liquidity
Banks can be subjected to a lot of risk if all depositors come and ask all their money at the same
time. This is a hypothetical situation but it has happened in real with Lehman Brothers – the bank
whose collapse gave us the 2008 recession.
So, Basel III puts a requirement for the banks to maintain some liquid assets all the time. Liquid
assets are those which can be easily converted to cash.
In India, this practice can be correlated with that of maintaining CRR and SLR.
Implementation of Basel III norms in India
The RBI has postponed the implementation of these norms to 2019.

It is important to note that it is not easy to implement these norms as it requires several changes
in the present banking system.
There are several challenges in the successful implementation of Basel III
norms.
1.Higher capital requirement for banks –
The private banks have the autonomy to raise capital from the markets. But the Public sector
banks have to rely on the government mostly. The government has recently decided to infuse
12000 Cr. rupees in the PSBs. In the coming years even more will be required.
2. More technology deployment –
Implementing the norms would require much more sophisticated technology and management
styles that the Indian banks are presently using. Upgrading both will impose huge cost on the
banks and hurt their profitability in the coming years.

3.Liquidity crunch –
Banks would need to invest more on liquid assets. These assets do not give handsome returns
usually which would reduce the bank’s operating profit margin. Further higher deployment of
more funds in liquid assets may crowd out good private sector investments and also affect
economic growth.
The way ahead for the banks
To address these issues and to protect their profitability margins, banks need to look beyond
regulatory compliance and take proactive actions.
In this regard the following strategies need to be adopted:
1. Change in Business Mix –
They will need to lend more to profitable yet safe sectors. For e.g. corporate loans. But even
corporate loans in India have been under a lot of stress. Banks are facing increasing NPAs (we
will talk about it in the next article). Still they are safer and more profitable than retail loans.
Priority Sector lending (PSL) however limits their options.
2. Low-Cost Funding –
One of the most important factors to meet the new regulations is to have a stable low-cost
deposit base. For this, banks need to focus more on having business correspondents/facilitators to
reach customers as adding branches will increase costs and have an impact on the profit margin.
The RBI is thinking of introducing UID based mobile wallets to increase the reach of the
financial system. Perhaps the banks can tie up with wallet operators based on some innovative
business model. There are many opportunities.

3.Improvement in systems and procedures –
Refining the systems and procedures may help banks economise their risk-weighted assets,
which will help reduce capital requirements to some extent. It is possible that they would impose
cost in the short-run, but they would yield great returns in the future.
Conclusion
It is clear that the banking system in the coming times will have to go through a lot of rough
weather. Increasing operational complexities, global interconnectedness and high economic
growth worldwide will present several challenges for the banks. While strategies like Basel III
will of course address these challenges, what is even more important is their proper
implementation. More than this, the banks will need to have a wider outlook. They must
anticipate changes in the Indian economic system and react accordingly. Indian banking
regulations are one of the most stringent and consequently one of the safest in the world. Let us
evolve each time better and stronger.

RBI & BASEL NORMS
RBI on every stage of Basel Norms I , II & III implemented guidelines to work in accord
with the rules and regulations for banks. Although , India was not among the G-10 countries of
1948 who implemented the Basel Norms, but was a member in the Basel Accord II. In May 2012
after the global recession RBI took a important step making the Basel rules and regulations more
effective in banking system of India.The guidelines are as follows:-
1. Guidelines on operational aspects of implementation of the Countercyclical Capital Buffer.

Guidance to banks on this will be issued in due course as RBI is still working on
these. Moreover, some other proposals viz. ‘Definition of Capital Disclosure Requirements’,
‘Capitalisation of Bank Exposures to Central Counterparties’ etc., are also engaging the attention
of the Basel Committee at present. Therefore, the final proposals of the Basel Committee on
these aspects will be considered for implementation, to the extent applicable, in future.
2. For the financial year ending March 31, 2013, banks will have to disclose the capital ratios
computed under the existing guidelines (Basel II) on capital adequacy as well as those computed
under the Basel III capital adequacy framework.
3. The guidelines require banks to maintain a Minimum Total Capital (MTC) of 9% against 8%
(international) prescribed by the Basel Committee of Total Risk Weighted assets. This has been
decided by Indian regulator as a matter of prudence. Thus, it requirement in this regard
remained at the same level. However, banks will need to raise more money than under Basel II
as several items are excluded under the new definition.
4. In addition to the Minimum Common Equity Tier 1 capital of 5.5% of RWAs, (international
standards require these to be only at 4.5%) banks are also required to maintain a Capital
Conservation Buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1
capital. CCB is designed to ensure that banks build up capital buffers during normal times (i.e.
outside periods of stress) which can be drawn down as losses are incurred during a stressed
period. In case suchbuffers have been drawn down, the banks have to rebuild them through
reduced discretionary distribution of earnings. This could include reducing dividend payments,
share buybacks and staff bonus.

5. Under the new set of guidelines, RBI has set the leverage ratio at 4.5% (3% under Basel
III). Leverage ratio has been introduced in Basel 3 to regulate banks which have huge trading
book and off balance sheet derivative positions.

RAGHURAM RAJAN‘ S TENURE & INDIA’S POSITION
When Raghuram Rajan took charge as Governor of the Reserve Bank of India in
September 2013, the rupee was in free fall , inflation was high. India had a large current acount
deficit and India’s exchange reserves were falling. As measure after measure failed to stabalize
markets, speculators sensed a full-blown crisis and labelled India one of the fragile five
economies.
Rajan’s response was to go all out , not just to tackle the crisis of confidence, but also to
send a strong message about the strength of India’s institutions and the country’s outgoing
programme of reform.He outlined a vision that went the immediate crisis to focus on long-term
growth and stability, thus restoring investor confidence. Boldness and farsightedness would be
characteristic of the decision he took in the ensuring three years.
ABOUT HIM
Raghuram G Rajan is a professor of finance in the Univeristy of Chicago. He was the

Governor of Reserve Bank of India between 2013 and 2016 and also served as the Vice-
chairman of the Board of Bank for International Settlements. Dr. Rajan was the chief Economist
and Director of Research at the International Monetary Fund from 2003 to 2006. Dr. Rajan co-

authored ‘Saving Capitalism from the Capitalists’ with Luigi Zingales and wrote ‘Fault Lines:
How hidden Fractures still threaten the world economy’ for which he was awarfded the Financial
Times- Goldman Sachs prize for the best businees book. In 2003, Rajan received the inaugral
Fischer Black Prize for the best finance researcher under the age of 40. Other awards he has
received include the Deutsche Bank Prize for financial economics in 2013, Euromoney’s central
banker of the year award 2014 and the Banker’s Global Central Banker of the year award in
2016.

WHEN RAJAN PROVED ALAN GREENSPAN WRONG
When Rajan was the chief economist of the International Monetary Fund , he was asked to
present a paper on the world’s central banking fraternity on how the financial sector had evolved
during the Greenspan’s term at helm. Alan Greenspan was the chairman of the Federal Reserve
Bank of United States of America from 1987-2006. Greenspan, the chairman of Federal Reserve
of the United States from 1987 to 2006, had built a formidable reputation as the presiding deity
of a long boom the US economy had undergone. A disciple of Ayn Rand, he swore by laissez-
faire policies and gave a free run to markets and unleashed growth. But his reputation lay in
tatters when the financial crisis struck the US in 2008. Time magazine put him at the top of a list
of "25 people to blame for the financial crisis". "The super-low interest rates Greenspan brought
in the early 2000s and his long-standing disdain for regulation are now held up as leading causes
of the mortgage crisis. The maestro admitted in an October congressional hearing that he had
"made a mistake in presuming" that financial firms could regulate themselves . Rajan, then the
chief economist at IMF, was the only party pooper at a mega event held in the honour of
Greenspan in 2005 when he was about to retire as the Fed chairman. Rajan was there to present a
paper ominously titled 'Has Financial Development Made the World Riskier?'
"He says he had planned to write about how financial developments during Mr.
Greenspan's 18-year tenure made the world safer," says a report in The Wall Street Journal. "But
the more he looked, the less he believed that. In the end, with Mr. Greenspan watching from the
audience, he argued that disaster might loom. Incentives were horribly skewed in the financial
sector, with workers reaping rich rewards for making money, but being only lightly penalized for
losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with
potentially big payoffs, which could on occasion fail spectacularly."
Rajan predicted a financial crisis. He argued that the financial market had developed to
become more complicated and less safe. He said financial instruments such as derivatives like
credit default swaps were risky. Former treasury secretary Lawrence Summers told the audience
that he found "the basic, slightly lead-eyed premise of [Rajan's] paper to be misguided".
Months after the collapse of the Lehman Brothers, Greenspan admitted at a

Congressional hearing his policies were wrong. "For years, a Congressional hearing with Alan
Greenspan was a marquee event. Lawmakers doted on him as an economic sage. Markets
jumped up or down depending on what he said. Politicians in both parties wanted the maestro on

their side. But on Thursday, almost three years after stepping down as chairman of the Federal
Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting
power of free markets and had failed to anticipate the self-destructive power of wanton mortgage
lending," wrote The New York Times.
That was the time when Greenspan might have remembered a certain professor of finance
telling him three years ago at a bash held in his honour that the financial crisis was in the
making.

Has Financial Development Made the World Riskier?
(Rajan’s paper on Global Recession in 2003)
Developments in the financial sector have led to an expansion in its ability to spread risks.
The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to
a range of financial transactions that hitherto were not possible, and has created much greater
access to finance for firms and households. On net, this has made the world much better off.
Concurrently, however, we have also seen the emergence of a whole range of intermediaries,
whose size and appetite for risk may expand over the cycle. Not only can these intermediaries
accentuate real fluctuations, they can also leave themselves exposed to certain small probability
risks that their own collective behavior makes more likely. As a result, under some conditions,
economies may be more exposed to financial-sector-induced turmoil than in the past. The paper
discusses the implications for monetary policy and prudential supervision. In particular, it
suggests market-friendly policies that would reduce the incentive of intermediary managers to
take excessive risk.
In the past thirt years, financial systems around the world have undergone revolutionary
change. People can borrow greater amounts at cheaper rates, invest in a multitude of instruments
catering to every possible profile of risk and return, and share risks with strangers across the
globe. Financial markets have expanded and deepened, and the typical transaction involves more
players and its carried out at greater arm’s length.
Atleast three forces are behind these changes . Technical change has reduced the cost of
communication and computation , as well as the cost of acquiring , procession ,and storing
information. For example , techniques ranging from financial engineering to portfolio
optimization, and from securitization to credit scoring, are now widely used. Deregulation has
removed artificial barriers preventing entry of new firms, and has encouraged competition
between products, institutions, markets and juridictions . Amd institutional change has created
new entities within the financial sector – such as private equity firms and hedge funds – as well
as new political, legal, and regulatory arrangements (for example, the emergence over the past
two decades of the entire institutional apparatus behind the practice of inflation targeting,
ranging from central bank independence to the publicationof regular inflation reports).

While these changes in the financial landscape have been termed ‘disintermediation’
because they involve moving away from traditional bank – centred ties, the term is a misnomer.
Although in a number of industrialized countries, individuals don’t deposit a significant portion
of their savings directly in banks any more, they invest indirectly in the market via mutual funds,
insurance companies , and pension funds, and in firms via venture capital funds, hedge funds,
and other forms of equity. The managers of these financial institutions, whom I shall call
‘investment managers’, have displaced banks and ‘reintermediated’ themselves between
individuals and markets.
What about bank themselves? While banks can now sell much of the risk associated with
the ‘commodity’ transactions they originate, such as mortgages, by packaging them and getting
them off their balance sheets, they have to retain a portion. This is typically the first loss, they
have to retain a portion. This is typically the first loss, that is, the loss from the first few
mortgages in the package that stop paying. Moreover, they now focus far more on transactions
where they have a comparative advantage, typically transactions where explicit contracts are
hard to specify or where the consequences need to be hedged by trading in the market. For
example, banks offer back-up lines of credit to commercial paper issuances by corporations. This
means that when the corporation is in trouble and commercial paper markets dry up, the bank
will step in and lend. Clearly, these are risky and illiquid loans. And they reflect a larger pattern:
as traditional transactions become more liquid and amenable to being transacted in the market,
banks are moving on to more illiquid transaction. Competition forces them to flirt continuously
with the limits of illiquidity.

FIGHTING INFLATION
The Reserve Bank of India was constituted to regulate the issue of Bank notes and the
keeping of reserves with a view of securing monetary stability in India and generally to operate
the currency and credit system of the country. Implict in these words are the core purposes of the
RBI : to foster monetary and financial stability conductive to sustainable economic growth, and
to ensure the development of an efficient and inclusive financial growth.
Rajan believed the best way RBI can foster sustainable growth in 2013, other than
developing the financial sector is through monetary stability- by bringing down the inflation over
a reasonable period of time. More specifically Rajan wanted to bring Consumer Price Inflation
(CPI) down to 8% by January 2015 and 6% by January 2016. The CPI in 2013 was 11.5%.
Rajan sought that interest rates have to stay higher to curb inflation. The idea behind this
was that the demand of Indian Rupee in the country would go down , as the supply was less. This
would affect the purchasing power of 1.3 million population. Hence bringing down the prices.
Rajan pinpointed the sources of inflation, especially food inflation and why bringing it
under control was in the farmer’s interest. Rajan was against the point of UPA that higher food
prices were in interest of farmers.

MONETARY POLICY COMMITTEE
Rajan had a huge milestone of bringing the 11.5% high inflation down. So, the Urjit Patel
committee was formed. A new milestone was achieved within the RBI as the report had pressed
for a formal inflation management agreement with the government , in an attempt to
institutionalize and make more credible the fight against inflation.
Rajan formed the framework for an independent monetary policy committee, which
would take over the setting of policy from the governor. A committee that would bring more
minds to bear on policy setting, preserve continuity in case member had to quit or retire and
would be less subject to political pressure.
The Monetary Policy Committee of India is responsible for fixing the benchmark interest
rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year and
it publishes its decisions after each such meeting.
The committee comprises six members - three officials of the Reserve Bank of India and
three external members nominated by the Government of India. They need to observe a "silent
period" seven days before and after the rate decision for "utmost confidentiality". The Governor
of Reserve Bank of India is the chairperson ex officio of the committee. Decisions are taken by
majority with the Governor having the casting vote in case of a tie. The current mandate of the
committee is to maintain 4% annual inflation until March 31, 2021 with an upper tolerance of
6% and a lower tolerance of 2%. [1]
The committee was created in 2016 to bring transparency and accountability in fixing
India's Monetary Policy.The monetary policy are published after every meeting with each
member explaining his opinions. The committee is answerable to the Government of India if the
inflation exceeds the range prescribed for three consecutive months.

CURRENT MONETARY POLICY COMMITTEE MEMBER
1. Governor of the Reserve Bank of India – Chairperson, ex officio - Shaktikanta Das

2. Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio -
[Viral V Acharya]
3. One officer of the Reserve Bank of India to be nominated by the Central Board –
Member,; - Michael Patra
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
5. Professor Pami Dua, Director, Delhi School of Economics – Member;
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad –
Member

BANKING SECTOR REFORMS
Raghuram Rajan in September inherited unprecedented banking reforms, which

include a drive to get lenders to clean up their bad debts and efforts to bring financial services to
millions of new customers.
Rajan’s most significant contribution was in pressuring lenders to recognize and make provisions
for sourced credit, though his successor still has “much work" to do such as getting banks to pass
on interest-rate cuts and regulating financial technology, said Nirmal Bang Institutional Equities
analyst Hatim Broachwala.
Rajan in his speech defending his policies, as he urged his successor to continue his campaigns
against bad loans and inflation. Below is a list of his key banking reforms and an analysis of
what’s needed to advance them.
Bad-loan clean up
Rajan, who has continually warned about hidden bad debt on Indian banks’ books, had given
lenders until 31 March next year to clean up stressed assets that have surged since 2010 and
amounted to about $120 billion in February. The project was a step toward eventually reviving
credit growth and bolstering India’s $2 trillion economy.
Increased competition in the banking system

In a bid to give more Indians access to financial services, Rajan took steps to introduce more
institutions into the banking industry. Analysts say that will push traditional lenders to become
more efficient as they will have to fend off competition from new entrants for low-cost deposit
streams and some fee-earning businesses.
Leveraging technology
Under Rajan, the RBI backed technology-based efforts to extend formal financial services to
hundreds of millions of Indians, many of them poor and disadvantaged.

Transmission of rate cuts
The RBI took steps to ease a funding squeeze for lenders to encourage banks to pass on
reductions in official interest rates, and also moved to improve the transparency of how charges
on borrowings are calculated.
Increasing Competition
The RBI is committed to freeing entry in banking. Rajan in his term announced two new
commercial banks which were waiting since years. Rajan first experienced and after making
appropriate changes announced a regular process of giving license.

NPA RESTRUCTURING
What are NPAs
A non performing asset (NPA) is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days.
Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12
months.
2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard
category for a period of 12 months.
3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted, although there may be some salvage or
recovery value.”
Status of NPA:
NPA problem is one of the most severe plaguing the Indian Banking sector posing questions
over the stability of Indian Banking System. Raghuram Rajan, the ex Governor of RBI has
identified the NPA problem as a major challenge facing the Indian Banking Sector. The problem
which was largely hidden earlier as Banks used to do window dressing of their account statement
has now come to the forefront after Rajan exhorted the banks to clean up their asset books by
March 2017. Resultantly this led to 29 public sector banks writing off Rs1.14 Lakh Crore of bad
debts between 2013 -2015, much more than what they had done in the preceding 9 years.
 The gross bad loans of 39 listed Indian banks, in absolute term, rose 92% in fiscal year
2016 to Rs.5.79 trillion even as after provisioning, the net bad loans more than doubled to
Rs.3.38 trillion.

 In percentage terms, the average gross non-performing assets (NPAs) of this group of
banks rose from 4.41% of loans in 2015 to 7.91% in 2016; net NPAs in the past one year
rose from 2.45% to 4.63%.
 Public sector banks, which have close to 70% market share of loans, are more affected
than their private sector peers. Two of them have over 15% gross NPAs and an additional
eight close to 10% and more.
 If we include restructured loans as well as those loans that have been written off, the total
stressed assets could be as much as one-fourth of loans, at least for some of the
government-owned banks.
India’s NPA problem is huge and has been gradually resolving but the pace has not been
upto the mark. In this context RBI has been at the forefront and has taken several measures in
recent years to resolve the problem of NPAs.
The measures taken by the RBI in recent years. E.g insisting on a more vigorous asset
quality review and providing a realistic picture of NPAs and provisioning ratios for the existing
stock of restructured loans that are showing signs of stress. In order to prevent banks from
liberally restructuring loans, the RBI cautioned that units not found viable would henceforth be
treated as substandard assets for the purpose of provisioning; scheme for sustainable structuring
of stressed assets.
Taking cognisance of the continuous increase in bad debts, the RBI further initiated
stringent measures in February 2018, as per which the lenders should identify incipient stress in
loan accounts and classify the stress accounts into three categories of special mention accounts
(SMA), depending upon the default of payments and report the data to the RBI under CRILC.
The resolution plan thereof would entail downgrading or upgrading of the loan accounts without
loss of time. The loan classification and reclassification would be an ongoing exercise.
According to which a portion of the stressed assets could be converted into equity of the
company; scrapped numerous loan restructuring programmes prevalent among banks to
restructure defaulted loans(CDR, SDR, S4A, JLF schemes) and made resolution of defaults time
bound with the Insolvency and Bankruptcy Code becoming the main tool to deal with defaulters
etc.

RAJAN ON NPA’s AND HIS STEPS
 Restructured standard account provisioning has been increased to 5% making it easier for
banks to go for restructuring. On the flip side, this has the potential to enhance tendency
of evergreening of loans
 RBI has directed banks to give loans by looking at CIBIL score and is encouraging banks
to start sharing information amongst themselves. This is to deal with cases of information
asymmetry. RBI has directed banks to report to Central Repository of Information on
Large Credit (CRILC) when principle/interest payment not paid between 61-90 days
 RBI has asked banks to conduct sector wise/activity wise analysis of NPA
 SEBI has eased norms for banks to convert debt of distressed borrowers into equity
 5/25 scheme
o For existing and new projects greater than 500 crores and also for existing
projects which have been classified as bad debt or stressed asset, bank can provide
longer amortization periods of 25 years with the option of restructuring loans
every 5 or 7 years
o The advantage of this scheme is that it provides for longer lending period with
inbuilt flexibility. Shorter lending periods leads to companies stretching their
balance sheet to pay back loans
o From bank’s point of view it is helpful as freshly restructured asset is considered

as bad debt and requires 15% provisioning by banks against such loans leading to
erosion of profitability for banks
 Strategic Debt Restructuring Scheme
o This scheme provides for an alternative to restructuring. Wherever restructuring

has not helped, banks can convert existing loans into equity. The scheme provides
for creation of Joint Lenders Forum which is to be given additional powers with
respect to
 Management change in company getting restructured
 Sale of non core assets in case company has diversified into sectors other
than for which loans were guaranteed

 Decision by JLF on debt restructuring by a majority of 75% by value and
60% by number
o On the positive side, willful defaulters are dissuaded as they fear the loss of their
company
o However there are several issues with the scheme
 Banks do not have expertise of managing companies
 The Joint Lenders Forum mechanism has an inherent conflict between

large banks and small lenders. The large banks have huge exposure and
thus they want to restructure the loans so as to avoid provisioning. The
smaller lenders fear arm twisting by large banks. Since they have less
exposure they are unwilling to throw good money after bad and prefer to
sell their exposure to ARCs as HDFC did in case of Essar Steel
o Assessment of SDR
 SDR is not performing too well. Of the 21 cases in which SDR has been
invoked, only 4 have been closed. The problems are:
 Difficulty in finding buyers
 Buyers demanding prices that are unacceptable
 Creditor’s concern over their source of funding and

credibility
 In the absence of potential buyers, bank wouldn’t want to

hold onto these assets indefinitely. Unless and until a
mechanism is devised which charts out a course of what to
do thereafter, it doesn’t make much sense to do this
conversion
 Disagreement over valuations
 Banks not willing to take severe haircuts
 Problem particularly acute in the infra sector where the

valuations have drastically declined over the past 2-3 years

 Choice of merchant bankers used in SDR Process has a huge
impact on the pace of the process. Quick resolution is necessary as
otherwise provisioning for bad loans eats a major chunk of the
bank’s profit
 Scheme for sustainable structuring of stressed assets – This allows banks to split the
stressed account into two heads – a sustainable portion that the bank deems that the
borrower can pay on existing terms and the remaining portion that the borrower is unable
to pay(unsustainable). The latter can be converted into equity or convertible debt giving
lenders a chance to eventually recover funds if the borrower is unable to pay. The
Scheme will help those projects which have started commercial operations and have
outstanding loan of over Rs 500crore. Banks will also need to set aside higher provisions
if they choose to follow this route.
o Advantages of new scheme
 To help restore credit flow to stressed sectors such as steel etc as credit
lending condition have been eased in the scheme
 Banks can rework their stressed accounts under the oversight of an

external agency. This means greater transparency in functioning of banks.
This is a provision of the scheme itself. Banks had earlier complained of
activism by investigative agencies in probing bad debt which made it
difficult for them to go for restructuring in even genuine cases
 This scheme would not only strengthen the lenders’ ability to deal with
stressed assets, but would also put real assets back on track, benefitting
both banks and the promoters of troubled entities.

CRR , SLR , REPO & REVERSE REPO RATES
REPO RATE
Repo rate is the rate at which RBI lends to its clients generally against government securities.
Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in
repo rate discourages the commercial banks to get money as the rate increases and becomes
expensive.
CASH RESERVE RATIO
Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep
with RBI in the form of reserves or balances. The higher the CRR with the RBI, the lower will
be the liquidity in the system, and vice versa. RBI is empowered to vary CRR between 15
percent and 3 percent. Per the suggestion by the Narsimham Committee report, the CRR was
reduced from 15% in 1990 to 5 percent in 2002. As of 27 December 2018, the CRR is 4.00
percent.
STATUTORY LIQUIDITY RATIO
Every financial institution has to maintain a certain quantity of liquid assets with themselves at
any point of time of their total time and demand liabilities. These assets have to be kept in non
cash form such as G-secs precious metals, approved securities like bonds etc. The ratio of the
liquid assets to time and demand liabilities is termed as the Statutory liquidity ratio.There was a
reduction of SLR from 38.5% to 25% because of the suggestion by Narsimham Committee. The
current SLR is 19.50%.
BANK RATE
The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for
providing funds or loans to the banking system. This banking system involves commercial and
co-operative banks, Industrial Development Bank of India, IFC, EXIM Bank, and other approved

financial institutions. Funds are provided either through lending directly or discounting or buying
money market instruments like commercial bills and treasury bills.
REVERSE REPO RATE
Reverse repo rate is the rate at which RBI borrows money from the commercial banks.

RAJAN’ S DECESION OF KEY INDICATOR RATES
REPO RATE & INFLATION
Rajan in his tenure bringing the 10.50% high inflation to 5.77% through his hawkish stance
with repo rates.

CONSUMER PRICE INFLATION & WHOLESALE PRICE INFLATION
BAD LOANS

INDIAN RUPEE RATE AGAINSR USD

“DEMONETISATION WAS NOT A GOOD IDEA” : RAJAN
Raghuram Rajan had revealed that he did not favour demonetisation as he felt the short
term economic costs associated with such a disruptive decision would outweigh any longer term
benefits from it.
Rajan in his book “I do what I Do” which is a compilation of speeches he delivered on a
wide range of issues as the RBI governor. Although he maintains the book is not a tell-all, the
short introductions and postscripts accompanying the pieces offer fascinating insights into his
uneasy relationship and differences with the present government.
“I was asked by the government in February 2016 for my view on demonetisation, which I
gave orally. Although there might be long-term benefits, I felt the likely short-term economic
costs would outweigh them,” Rajan wrote.
Government data showed the November 8 decision to scrap Rs 1,000 and Rs 500 notes,
sucking out 86% of cash circulating in the system, has had a lingering impact on the
economy.The growth of GDP slowed sharply from 7% in October-December quarter to 6.1% in
January-March and 5.7% in April-June, primarily because of the cash squeeze that weakened
consumer spending and discouraged businesses from making new investments.
Rajan resigns the office at 3 September 2016.

URJIT PATEL TAKES CHARGE
Urjit Patel officially took charge as the governor of the Reserve Bank of India (RBI) on
Sept. 04. Patel, who succeeds Raghuram Rajan, comes in at a time when India is working to
solve the sticky problem of inflation and its banks are battling massive non-performing assets.
ABOUT HIM
Urjit Patel (born 28 October 1963) is an Indian economist, who served as

the 24th Governor of the Reserve Bank of India (RBI) from 4 September 2016 to 10 December
2018. Previously, as an RBI deputy governor, he looked after monetary policy, economic policy
research, statistics and information management, deposit insurance, communication and Right to
Information. Appointed by the NDAgovernment, Patel succeeded Raghuram Rajan as RBI
governor on 4 September 2016.
He played an advisory role in the development of the debt market, banking sector
reforms, pension fund reforms, targeting of real exchange rate. After the two-year deputation
with RBI, Patel became a Consultant to the Government of India in the Ministry of Finance,

Department of Economic Affairs - a position he held from 1998 to 2001.[6] He served on the
board of Gujarat State Petroleum Corporation in 2006-07.

THE BIG BOOM : DEMONETISATION ON 8 NOVEMBER
Although rumours in the country were that Raghuram Rajan resigned his office due to
conflicts of interest between PM Modi & Rajan , Urjit Patel the incubment governor at that time
saw it as a “ONCE IN A LIFETIME EVENT”.
Of the Rs 15.41 lakh crore worth Rs 500 and Rs 1,000 notes in circulation on November 8,
2016, when the note ban was announced, notes worth Rs 15.31 lakh crore had been returned.
Indians deposited over 99% of banned currency notes in various banks, according to
the Reserve Bank of India’s (RBI) annual report released (Aug. 29).
The Modi government had listed curbing unaccounted wealth as the primary intention of
the move, along with making India a less cash-based economy. Immediately after the note ban,
digital transactions saw a spike due to the acute cash shortage.
About 40-50,000 people were deployed to refit the ATMs.

DEMONETISATION : A PROVEN FAILURE ?
Demonetization technically is a liquidity shock; a sudden stop in terms of currency

availability. It created a situation where lack of currencies jams consumption, investment,
production, employment etc. The intensity of demonetization effects clearly depends upon the
duration of the liquidity shocks.
The original intent of demonetisation was to address the issue of black money. There is
enough work that suggests that people with black money hold a very small proportion of it in
cash. Most of it is usually invested in gold, or real estate, or in the stock market, or abroad, and
the share of black cash is 6% of the total black economy.
The primary pitch and narrative of the demonetisation drive by Prime Minister seems to
have taken a major shift to cashless economy from the initial key highlights of war against black
money, corruption and counterfeit currency.
Data released by the Central Statistics Office (CSO) showed the economy grew 5.7% in
April-June, the first quarter of the current fiscal year, slower than the previous quarter’s 6.1%.
The first half of the last fiscal year, that is the period prior to demonetisation, recorded a real
growth of 7.7%.
There are multiple villains to blame, though, the most immediate being the damper of
demonetisation of November 2016 and the implementation of the goods and services tax (GST)
in July this year. There has been a sign of distrust in financial investments.
While GST pushed up gold buying, it pushed down manufacturing. Manufacturing

companies sent out their old stocks to market, holding back on production. It brought down
manufacturing sector growth from 5.3% in January-March to 1.2% in April-June. In the post-
rabi-season quarter we expected strong agricultural growth but it was pulled down by the animal
husbandry sector. In fact, animal husbandry, specifically buffalo meat exports, has been the
leading contributor to growth among all the areas that are clubbed under agriculture.
Uttar Pradesh, India’s largest meat processing state faced huge shutdowns from end-
March. Livestock contributes a little over 4% to GDP and roughly a quarter of total agricultural
GDP. Agri-sector growth dropped to 2.3% in April-June quarter against 2.5% in the same quarter

of 2016. Robust government expenditure rose 27% in the April-June quarter, to 6.5 lakh crore.
The not so good news: fiscal deficit touched 92% of its budget estimates by July. At the same
time, some of the government’s revenue-generating plans have not being implemented.
While disinvestment and spectrum sales have yet to make significant headway.

RBI’ S AUTONOMY & GOVERNMENT
According to a paper published in the International Journal of Central Banking in
2014, RBI was listed as the least independent among 89 central banks considered under the
study.These rankings are likely to have improved since the adoption of inflation targeting in
February 2015 and formation of Monetary policy committee in October 2016.
However, vacancies in RBI’s board and government’s reluctance to fill them up raises questions
about the decisions taken and whether proper deliberations on those decisions are being
held.During the previous government, a Financial Sector Legislative Reforms Commission was
formed which made various recommendations to cut down RBI’s powers.In 2013, a financial
sector monitoring body, called Financial Stability Development Council was established which
was to be chaired by the Finance Minister.In essence, the RBI Act 1934, does not empower RBI
absolute autonomy. However, it does enjoy some independence when it comes to performing its
regulatory and monetary functions.
Urjit Patel and the deputy governors had mainly criticized the government of letting them
less control over the PSU banks. RBI Governor Urjit Patel told a parliamentary panel in June that
it does not have enough powers over PSBs.
BACK-GROUND
Reserve Bank of India, the central bank of the country is an autonomous organization
responsible for all the key monetary roles like Monetary controls, money supply regulation,
foreign exchange, apex lender to Government, a bankers’ bank among others. RBI was created
and is governed with the RBI Act and as such is a statutory autonomous entity. However, in
October 2018, the Ministry of Finance, Government of India moved to invoke Section 7 of the
RBI Act. The Section 7 gives powers to the government to seek consultations with RBI. If
necessary, the Government may issue certain binding orders on RBI in public interest. Despite
keeping its existence in RBI Act, this section has never posed any threat to RBI Auotonomy
earlier as it has never been invoked even during the times of Wars fought with Pakistan and
China; during the adverse balance of payment crisis or even during the period of demonetization
that happened on November 8, 2016. The three letters under Section 7, that were sent by the
Government of India to Reserve Bank of India for consultation included the issues like Capital
Adequacy Norms for Banks governed by RBI, Liquidity Crisis, Credit to Micro, Small and

Medium Enterprises (MSME), Corrective measures for weak banks among others.Promptly
responding to these letters of GoI, the Reserve Bank of India remained firm on its stance and did
not commit for the changes as desired by the Government in its policy and action plan. The
series of events after this communication let the problem aggravate and it is being speculated that
the autonomy of the apex Monetary Authority of India, RBI is at stake and as a result the Head
of RBI – Mr Urjit Patel may step down. During all this controversy, Mr Arun Jaitley, the Finance
Minister of India has asserted that the Government respects the RBI Autonomy and also feels it
is necessary to maintain. Accordingly, the finance ministry has not yet given direction to the RBI
to follow the instructions issued by it while invoking the Section 7 of RBI Act.
Recent developments have subsided the prospects of rift between RBI and the
Government. The earlier event indicating the beginning of conflict between the Apex Monetary
Authority The Reserve Bank of India (RBI) and the Financial Authority – Ministry of Finance-
Govt of India had sparked speculations that the Governor of RBI, Mr Urjit Patel could step down
as the RBI feels that Government which should not interfere in its Monetary affairs in keeping
and improving the monetary position of the country to a healthy and globally competitive
standard, was trying to make unnecessary intervention that may hamper its autonomous working.

SHALL RBI’s EXCESS RESERVE USED TO MEET
GOVERNMENT FISCAL DEFICIT NEEDS ?
RBI has a total reseve of currency and gold revaluation account (Rs 6.91 trillion) and the
contingency fund (Rs 2.32 trillion). The central board of RBI had decided to constitute a
committee of experts to examine an economic capital framework (ECF), the membership and
terms of reference of which will be jointly determined by the government and the RBI & to
check the scope of whether RBI can share its Rs. 1 trillion excess reserve to meet the government
fiscal needs.
The current fiscal deficit of India is 115% more of the total budget alloted. With 2019
interim budget of Rs.7 lakhs crores , the government predicts a total Rs. 7 lakhs crore rupees of
fiscal deficit. Also in terms of GDP , the fiscal deficit is 3.4% of total GDP.
The Centre is anxiously about on the surplus reserves of RBI in which the central bank
necessitates as an emergency buffer not meant to be shared.But the Reserve Bank of India
is staunchly resisting the government’s demand to transfer a part of its reserves as surplus, the
central bank sees no problem with paying interim dividend from its operations.
Income Sources and Expenditure of RBI:
A Central Bank is primarily meant to promote the financial and economic stability of the
country.The Central Bank of a country promotes economic growth and stability and controls
inflation.
The majority of the income comes from:
 The returns it earns on its foreign currency assets, which are either in the form of bonds
and treasury billsof other Central Banks like Federal Reserve of USA.
 It also earns money through Open Market Operations, which it undertakes regularly
to manage liquidity.
 The RBI can also invest in top-rated securities across the World.
 It also earns money by lending to banks for very short tenures, such as overnight repo.

 RBI has also been more active in the forward currency markets and it also earns income
this way also.
 It also earns money by lending to banks for very short tenures, such as overnight repo.
 RBI has also been more active in the forward currency markets and it also earns income
this way also.
Expenditures of RBI:
 The main Expenditure of RBI is Printing of currency notes. (Recently Demonetisation

made to printing of new currency).
 It gives commission to the banks for the operation of accounts of State Govts and Central
Govt. by various commercial banks on its behalf.
 Interest to be paid, when it undertakes reverse repo operations.
Aim of keeping reserves by RBI: what’s the objective of these reserves?
 The CGRA (currency and gold revaluation account) is meant to cover a situation where
the rupee appreciates against one or more of the currencies in the basket.
 The basket has several currencies ranging from the dollar to the euro and the yen or if
there is a decline in the rupee value of gold.
 The level of CGRA now covers about a quarter of the total currency reserves of the RBI.
 The CGRA, which serves as a risk management technique for the RBI, has shown large
variations over the years due to revaluation of foreign exchange assets.
 The contingency reserve is meant to cover depreciation in the value of the RBI’s holdings
of government bonds– domestic and foreign– if yields rise and their prices fall.
 The reserve is also meant to cover expenses from extraordinary events such as
demonetisation, money market operations and currency printing expenses in a year of
insufficient income.

 Most important of all, the contingency reserve supports the mother of all guarantees the
central bank’s role as the lender of the last resort.
 The reserve is also a cover for the deposit insurance fund given that the Deposit
Insurance and the Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary
of the RBI.
The money supply has an important bearing on the functioning of the

economy.The management of the money supply and credit control is an important function of the
Reserve Bank of India.As India has grown at a rapid pace in the past and is expected to maintain
this growth chart in the coming couple of decades, foreign investors have been pouring money
here to reap the benefits of this growth and that is how India has enjoyed a major uptick in
its foreign exchange reserves.To maintain the value of rupee and thereby our forex reserves,
India is required to become innovative, competitive and efficient.It is required to win foreign
investors trust and thereby become a reliable partner in its future growth.The central bank has
still been able to navigate India properly, especially now when our foreign exchange is at an all-
time high of over 390 bn $ and inflation coming under control.Therefore, The Committee should
be set up with representatives from Government, the Central Bank, academicians and the
market.The Committee should go into all the aspects of RBI’s balance sheet, suggest a safe
buffer in reserves and fair method of sharing the reserves.

RBI PANEL ON ECONOMIC CAPITAL FRAMEWORK
RBI has constituted a panel on economic capital framework. It will be headed by Ex-RBI
governor Bimal Jalan.
The expert panel on RBI’s economic capital framework has been formed to address the issue of
RBI reserves—one of the sticking points between the central bank and the government.
What’s the isssue?
The government has been insisting that the central bank hand over its surplus reserves amid a
shortfall in revenue collections. Access to the funds will allow the government to meet deficit
targets, infuse capital into weak banks to boost lending and fund welfare programmes.
Terms of reference:
 The panel will decide whether RBI is holding provisions, reserves and buffers in surplus
of the required levels.
 It would propose a suitable profits distribution policy taking into account all the likely
situations of the RBI, including the situations of holding more provisions than required
and the RBI holding less provisions than required.
 The ECF committee will also suggest an adequate level of risk provisioning that the RBI
needs to maintain. That apart, any other related matter, including treatment of surplus
reserves created out of realized gains, will also come within the ambit of this committee.
What is economic capital framework?
Economic capital framework refers to the risk capital required by the central bank while taking
into account different risks. The economic capital framework reflects the capital that an
institution requires or needs to hold as a counter against unforeseen risks or events or losses in
the future.

Why it needs a fix?
Existing economic capital framework which governs the RBI’s capital requirements and terms
for the transfer of its surplus to the government is based on a conservative assessment of risk by
the central bank and that a review of the framework would result in excess capital being freed,
which the RBI can then share with the government.
The government believes that RBI is sitting on much higher reserves than it actually needs to tide
over financial emergencies that India may face. Some central banks around the world (like US
and UK) keep 13% to 14% of their assets as a reserve compared to RBI’s 27% and some (like
Russia) more than that.
Economists in the past have argued for RBI releasing ‘extra’ capital that can be put to productive
use by the government. The Malegam Committee estimated the excess (in 2013) at Rs 1.49 lakh
crore.
What is the nature of the arrangement between the government and RBI on
the transfer of surplus or profits?
Although RBI was promoted as a private shareholders’ bank in 1935 with a paid up capital of Rs
5 crore, the government nationalised it in January 1949, making the sovereign its “owner”. What
the central bank does, therefore, is transfer the “surplus” — that is, the excess of income over
expenditure — to the government, in accordance with Section 47 (Allocation of Surplus Profits)
of the Reserve Bank of India Act, 1934.
Does the RBI pay tax on these earnings or profits?
No. Its statute provides exemption from paying income-tax or any other tax, including wealth
tax.

Why the committee was formed?
1.The RBI and the government were at loggerhead over the transfer of surplus. The committee
has been formed to look into t his issue. The committee will: Decide whether RBI is holding
provisions, reserves and buffers in the surplus of the required levels.
2.Propose a suitable profits distribution policy taking into account all the likely situations of the
RBI, including the situations of holding more provisions than required and the RBI holding
lesser provisions than required.
3.Suggest an adequate level of risk provisioning that the RBI needs to maintain. The committee
is expected to provide for an objective criterion to address the friction between the government
and the RBI .

COLLAPSE OF IL&FS
What is IL&FS?
 IL&FS Ltd, or Infrastructure Leasing & Finance Services, is a core investment company
and serves as the holding company of the IL&FS Group.
 IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India
and Housing Development Finance Co to fund infrastructure projects
 IL&FS’s major shareholders include: Life Insurance Corp of India holding 25.3% stake,
State Bank of India with 6.42%, Japan’s Orix Corp holding 23% and the Abu Dhabi
Investment Authority with 12%
 IL&FS is termed as a “shadow bank.” The term is used to refer to the non-bank financial
intermediaries that provide services similar to traditional commercial banks.
What is IL&FS crisis?
 IL&FS has run out of money and, therefore, has been unable to service its repayment
obligations. According to the latest available data, the company has a total consolidated
debt of Rs. 90,000 crores.
 The crisis began in august 2018, when ILFS defaulted on the payment of Rs.1000 Cr that
was issued by SIDBI
 This was followed by a series of defaults on commercial papers, debentures, term loans
and Inter-Corporate Deposits.
 The series of defaults led to a ratings downgrade. The credit rating of debt instruments
issued by IL&FS was rated at AAA (highest credit rating) till the end of August 2018.
Credit-rating agency ICRA downgraded the company’s creditworthiness to ‘D’ (default
grade). Further, Credit rating agency CARE also downgraded several subsidiaries of
IL&FS.
 A downgrade in the credit rating led to lowering of price of bond’s which affected debt
funds.

Factors contributing to default:
1. Assets-Liability mismatch: The major reason for the crisis negative Asset liability
mismatch as the outflow of liabilities became more than the inflow of assets.
 IL&FS invested in projects with a gestation period of 10 to 15 years by borrowing for a

period of 8 to 10 years and then would get the project refinanced. But in the recent years
the banks stopped refinancing (due to RBI guidelines) and the company was forced to
borrow from the market by issuing CPs and debentures.
 Investing in long term assets but borrowing money on short duration debt instruments led
to a huge asset liability mismatch.
2. Lack of access to short-term loans: Unlike Banks, NBFCs (like IL&FS) do not have
access to RBI repo window.
3. Unviable Projects: Investment in unviable projects has been a major issue for ILFS and
nearly 60000 crore debt of IL&FS is at project level including road power and water
projects. The factors which slowed down infrastructure projects and made them unviable
are:
 Complications in land acquisition

 Delay in environmental clearances and consequent delay in completion of projects
 Cost escalation also led to many incomplete projects
 Lack of timely action aggravated the problems
4. Structural defaults: The business structure of ILFS has a fundamental flaw which
exposes it to both the financial and project risks in the infrastructure sector.
 Special Purpose Vehicle Model: As an investment company, IL&FS has no business of

its own. It invests in subsidiaries, chiefly in infrastructure, financial services and
education, which in turn invest in subsidiaries and associates executing projects. Again,
the financial services entity invests in infrastructure and real estate, including in
companies of the holding company.
 Generally, money is expected to flow back from the subsidiaries as dividends, interest
payments on loans from the parent and even sale of these subsidiaries or associate

companies. However, during crisis these payments get backed up, the whole organization
is adversely affected.
5. Issues with management: The RBI had expressed concerns about the operations of
IL&FS Financial Services (IFIN) in 2015. RBI’s inspection report pointed out “that the
net-owned funds of the finance company had been wiped out and that it was over-
leveraged.” Further, the report stated that the management had declined to take corrective
measures
Issues/ Concerns:
1. Doubts over infrastructure projects: The government fears that IL&FS’s inability to
finance and support the projects could damage the infrastructure sector.
2. PPP Model: The IL&FS crisis has raised concerns over India’s public-private
partnership (PPP) programme to finance infrastructure projects. India’s PPP model in
infrastructure has been crippled by delays, the poor health of sponsors, stressed assets and
the reluctance of bank to provide funding has derailed many plans
3. Credibility of Rating Agencies: The credit rating industry has come under scrutiny after
the firms that assessed IL&FS failed to see the financial troubles of IL&FS. This is
because of undue weightage given to IL&FS’s parentage –The strength of the investors in
the parent company and IL&FS was considered equal to a sovereign/public sector firm).
This overrode the research and evaluation of underlying business and its ability to sustain
and survive and failed to predict the crisis.
4. Accountability: Despite RBI raising concerns over the financial health of IL&FS, the
company’s management failed to take corrective measures thus raising concerns over
transparency, accountability and corporate governance of such companies.
5. Regulation: Unlike traditional banks, NBFCs are not strictly regulated. The IL&FS crisis
has raised concerns over the regulation of such entities.
Impact of IL&FS crisis:
1. On debt market: A downgrade in credit rating lowers the bond’s price- this reflects in
market price in traded bonds or rating agencies revalue the bonds. The extent of the fall
depends on the nature of the downgrade. In IL&FS case, because the downgrade was
steep – from a top rating into below investment grade, the hit on prices was pronounced.

2. On other NBFCs:
 After the IL&FS crisis stocks of Housing Finance Companies (HFCs) and other non-
banking financial institutions (NBFCs) fell down.
 According to rating agency Moody, NBFCs will be significantly impacted if the liquidity
distress triggered by IL&FS crisis continues. Also, investors will hesitate in investing in
NBFCs
 The IL&FS default could lead to Liquidity tightness thus consequently raising the
financing costs for NBFCs.
3. On NPAs of Bank: Out of the total debt of IL&FS, Rs. 57000 crores have been taken
from the banks. This can further aggravate the NPA burden on banks.
4. On Economy: According to Moodys, any effects on the NBFCs will spill over to the
broader economy mainly through the credit channel because NBFCs are a ‘material
provider of credit for the economy’. Slowdown in credit growth provided by NBFCs will
hamper overall consumption and economic growth
Options available to address crisis:
1. Offer right issues: This would enable IL&FS to generate extra funds to recapitalise. But
as per media report a 4500cr right issue is highly under subscribed.
2. Sell assets to repay debt: IL&FS has approached National Company Law Tribunal for
asset sale resolution and get liquidity to repay debtors. SBI has already proposed to buy
good quality assets worth Rs 45,000 crore from NBFCs.
3. Address liquidity issues till the asset sale restarts: IL&FS could manage extra fund
from financial institutions like LIC and SBI to pay its immediate liabilities.
4. Bailout by government: There is report of bailout of IL&FS by government. Although
bailout plan may restore liquidity and avert another major bank collapse but it is highly
expensive and set a bad precedent.
Steps taken:
1. New Board formed:

Post IL&FS crisis, the government filed a petition at NCLT under section 241 and 242 of
Companies Act. The NCLT had allowed government to take over the board of the IL&FS fearing
a contagion effect. Following this, the government appointed a new 6-member board to manage
the IL&FS, which has been headed by Mr Uday Kotak.
2. Steps to increase liquidity and tackle credit crunch:
The RBI took the following steps-
 Conducted OMO (Open Market Operations)

 Relaxed liquidity norms to ease the strain in the financial markets and allowed more bank
lending to NBFCs. The provision will allow banks to free up Rs 50,000-60,000 crore of
liquidity which banks can lend to NBFCs till December 31, 2018
Way ahead:
1. Centre should look at long-term solutions for pending clearances and payments by central
agencies for infrastructure projects.
2. Adequate investigation into the affairs of the company is essential to ensure that the crisis
does not lead to even bigger financial contagion and hamper the economy.
3. NBFCs should not have an aggressive asset liability management profile, instead evolve
a culture of moderate growth and profitability. Further, NBFCs should adopt more
transparency in terms of disclosure on the liability side to avoid any mismatch.
4. NBFCs should not rely on short term sources for funding long term projects.
5. Credit rating agencies should assess the standard of the corporate governance, the
management team and the inherent business model of a company.
6. The IL&FS crisis has highlighted the loopholes in regulation of NBFCs and thus there is
an urgent need to strengthen the regulatory framework of NBFCs

THE PNB SCAM & RBI
State-owned Punjab National Bank (PNB) disclosed that it has discovered around Rs
11,400 crore worth of fraudulent transactions. The lender named firms and people associated
with billionaire jeweller to conspire with some of its officials to defraud the bank using bank
guarantees. This bank fraud is another cause of worry as the Indian banking system is already
reeling under the pressure of growing NPAs, or non-performing assets.
What is the fraud about?
The failure has occurred at many levels. From handful employees at the level of the bank; senior
management and auditors who did not track these problematic transactions for years; even RBI
for creating opacity with new financial instruments and The Finance Ministry for failing in its
oversight and regulation are the major reasons for the current fraud.The main issue of the scam is
with the new financial instrument, the letter of undertaking (LoU).The PNB scam relied on the
existence of an unusual financial instrument, the letter of undertaking (LoU).This is a bank
guarantee that enables a bank’s customer to raise short-term credit from another Indian bank’s
foreign branch. It has to be another Indian bank.It was created by the RBI as an additional
incentive to importers who could then avail of cheaper credit abroad.
What is irregular about this?
In the normal course, when an importer goes to a bank to ask for such a guarantee, one of two
things happens. One, the bank asks him for collateral before it gives a guarantee. Second, the
bank sanctions a credit limit.That means it will evaluate the importer and says he is good to be
given a loan for a certain amount.In the PNB fraud case, the bank employees had sent these
guarantees (unauthorised letters of undertakings (LoUs)) in the absence of credit limits and
collateral security.These LoUs which are equivalent to providing credit and should be recorded
as contingent liabilities were not so recorded. In some cases, corresponding entries were made in
the core banking system, but for lower amounts.When loans are not repaid — in this case vast

amounts borrowed from other banks based on these LoUs were apparently siphoned off to shell
companies.What was intended to be trade credit was misused, with no record and monitoring of
the spending from those loans.
WAY FORWARD
Banking failures have large social consequences given the deep financial linkages banks have
with each other as well as with other parts of the economy.Privatisation is surely not the answer.
It shows the acceptance of procedural weakness of the fiscal system and might mean much
higher costs for the common man.The government may ask banks to go for more “hair cut” or
write offs for NPAs.The Banking Regulation Act may be amended to give RBI more powers to
monitor bank accounts of big defaulters.RBI wants stricter rules for joint lenders’ forum (JLF)
and oversight committee (OC) to curb NPAs.The NPA problem has to be tackled before the time
a company starts defaulting. This needs an early risk assessment by the lenders.Strategic debt
restructuring (SDR) scheme and sustainable structuring of stressed assets (S4A) has to be
implemented in timely manner.Recovering from current Banking problems will require stricter
adherence to sound banking rules and more transparency and accountability from both public
and private players. The key issue is one of poor regulation, and not ownership. Indeed, despite
current trust in the public banking system is still visible because of sovereign guarantee.Poorly
regulated private banks are even more prone to scams and failure as the financial sector is rife
with information asymmetries and market imperfections.

INTERVENTIONS TAKEN BY PATEL TO ADDRESS THE
SCAM ISSUES
 Improving governance quality of states:-As the economic survey has pointed out that
income divergence among people is due to due togovernance or institutional traps in
states, so it is a crucial aspect to work upon’
 Reinventing the role of Inter-state and Zonal councils:-these avenues should be used for
comprehensive partnerships for collective and balanced regional growth leading to
economic convergence
 Stop ignoring unskilled labour:-while focus must remain on ‘skilling’ India, the largely
unskilled labour must be utilised to make states engines of exports as the low-skilled
sectors prevail mainly in backward states
 Competitive federalism with government aid:- Interstate competition should be promoted

to encourage states to liberalise regulatory framework, especially land and labour as well
as other factors of production.
 Inter-municipal competition:-Local self governments must be empower to lessen the inter

regional disparities by being responsible for disbursal of funds of government schemes
and implementation of infrastructural programmes.
 Multilateral agencies:-such as World Bank, Asian Development Bank, New Development

Bank, Asian Infrastructure Investment Bank could be roped in to provide for the finance
for state’s development if domestic funds are low. Government’s order in allowing
effective states to borrow directly from abroad is a positive step in this direction.
 Focus on agriculture:-as seen that states dependent on agriculture fare below than
manufacturing states. Centre must intervene on issues such as APMC reforms citing the
clause of ‘Actionable wrongs’ in Concurrent list.
 The mandate and role of the NITI Aayog should be redefined and enhanced to evolve
models aimed at balanced regional development. It is axiomatic that the reticence of
private investment in backward states can be somewhat overcome through enhanced
public outlays.

RECAPITALIZATION OF BANKS BY URJIT PATEL
(2.11 Lakhs crore)

The Centre unveiled an ambitious plan to infuse Rs 2.11 lakh crore capital over the next
two years into public sector banks (PSBs). 1.35 lakh cr. will be through sale of recapitalization of
bonds.
Introduction
PSBs are burdened with high, non-performing assets and facing the prospect of having to take
haircuts on loans stuck in insolvency proceedings. Indiscriminate lending earlier by banks is the
main reason for high level of NPAs (non-performing assets).
The government’s capitalisation package for public sector banks will provide a strong booster
dose of relief for the capital starved public sector banks.
Why does recapitalizing PSBs a more effective remedy?
With India’s economic growth faltering in the last couple of years, the government has been
casting about for ways to galvanise the economy like Demonetisation and introduction of GST.
Its economic benefits will be long in coming while the short-term disruption has been very real.
 Recapitalising public sector banks (PSBs) and enhancing the flow of credit is critical for
revitalising India’s growth momentum at a time when the global economy is recovering.
 The move is vital for the slowing economy as private investments remain elusive in the
face of the “twin-balance sheet problem” worrying corporate India and public sector
banks reflected in slow bank credit growth.

What is the Twin Balance Sheet Problem of India?
Twin Balance Sheet Problem (TBS) deals with two balance sheet problems. One with Indian
companies and the other with Indian Banks. TBS is two two-fold problem for Indian economy
which deals with:
 Overleveraged companies – Debt accumulation on companies is very high and thus they
are unable to pay interest payments on loans.
 Bad-loan-encumbered-banks – Non Performing Assets (NPA) of the banks is 9% for the

total banking system of India. It is as high as 12.1% for Public Sector Banks. As
companies fail to pay back principal or interest, banks are also in trouble.
Indian PSBs: NPAs and capital needed
Higher cost, lower revenues, greater financial costs-all squeezed corporate cash flow leading to
NPAs in the banking sector.
 ‘Capital’ is a combination of equity, equity-like instruments and bonds.
 For a given balance sheet, there is a certain minimum of capital that banks must hold.
This is called ‘capital adequacy’. The higher the capital is above the regulatory minimum,
the greater the freedom banks have to make loans. The closer bank capital is to the
minimum, the less inclined banks are to lend. If capital falls below the regulatory
minimum, banks cannot lend or face restrictions on lending.
 When loans go bad and turn into non-performing assets (NPAs), banks have to make
provisions for potential losses. This tends to erode bank capital and put the brakes on loan
growth.
 ‘Stressed advances’ (which represent non-performing loans as well as restructured loans)

have risen from a little over 10% in 2012-13 to 15% in 2016-17. This has caused capital
adequacy at PSBs to fall.
In this context, for bailing out of stressed Banks, the role recapitalization is very significant.

Provisioning of NPA, how it is done by banks?
Provisioning is made by Banks to make up for reduction of asset value in their advances
portfolio. The amount is calculated on the basis of RBI guidelines on income recognition, asset
classification and provisioning.
Assets are classified into four categories like standard, sub-standard, doubtful and loss.
 All advances where interest and instalments are served in time are called standard assets.
 However, where interest instalments are not served for 90 days and more are considered
as sub-standard.
 Assets which remain in sub-standard category for one year are considered doubtful.
 Apart from these, the assets which are noticed by Bank’s Statutory Auditors and RBI
Inspectors, where asset value is completely eroded are considered loss assets.
 100% provision is made for both Loss as well as Doubtful assets by Banks.
 If asset value is unsecured full provisioning is made for unsecured portion of doubtful
assets like that of loss assets.
 In case of sub-standard assets a general provision of 15% of advance amount is provided.

However, if advance is unsecured, then an additional 10% is provided as a part of risk
management strategy.
Where it is unrealized, legal measures are taken through SARFAESI Act, and DRT (Debt
Recovery Tribunal).
What are the causes of deceleration in credit growth?
1. Poor demand:
Some observers ascribe the deceleration in credit growth to poor demand. They say that
corporates have excessive debt and are in no position to finance any investment. This may be
true of large corporates. Moreover, demand for investment finance may have
decelerated but demand for working capital remains strong.

2.Supply of credit:
The government has realised that there is a problem with the supply of credit. It has to
do with PSBs’ inability to lend for want of adequate capital.
 Market estimates had placed the requirement of government capital at a minimum of

Rs.2 lakh crore over a four-year period.
 In 2015, under the Indradhanush Plan, the government chose to commit a mere
 Rs 70,000 crore over the period.
1. PSBs, unlike their private sector counterparts, had lent heavily to infrastructure and other
related sectors of the economy. Following the global financial crisis of 2007, sectors to
which PSBs were exposed came to be impacted in ways that could not have been entirely
foreseen.
2. The failure to quickly recapitalise PSBs has adversely impacted the economy.
 It has hindered the effective resolution of the NPA problem and kept major projects from
going through to completion.
 Corporates are stuck with high levels of debt and are unable to make fresh investments.
What is the source of funds for Recapitalization by government?
 Of the Rs 2.11 trillion package, Rs 1.35 trillion will be towards issue of recapitalisation
bonds. PSBs will subscribe to these bonds. The government will plough back the funds
into banks as equity.
 Another Rs 180 billion will be provided as budgetary support.
 The remaining Rs 580 billion will be raised from the market.
 Analysts believe the package should enable banks to provide adequately for NPAs and
support modest loan growth. Once PSBs have enough capital, they can liquidate excess
holding of government securities and use the cash to make more loans.

Fiscal impact of the recapitalisation package
Analysts worry about the fiscal impact of the recapitalisation package.
 International norms allow borrowings for bank recapitalisation not to be counted towards
the fiscal deficit.
 In the past, India has used this accounting practice.
 The proposed recapitalisation bonds are likely to add to the fiscal deficit unless the
government resorts to other practice such as getting the Life Insurance Corporation of
India or a separate holding company to issue the bonds.
 The International Monetary Fund has documented 140 episodes of banking crises in 115
economies in the world in the period 1970-2011. The median cost of bank recapitalisation
in these crises was 6.8% of GDP. India’s cost of recapitalisation over a 20-year period is
less than 1% of the average GDP during this period.
Way Forward
The government should not worry unduly about missing the fiscal deficit target of 3.2% of GDP.
The markets will understand that the fiscal stimulus is well spent.
The government has shown courage in opting for substantial recapitalisation of banks. This is not
something that fits into the ‘reform’ mantra whereby private is good and public is bad.
Reserve Bank of India Governor has welcomed the move in effusive terms: “The Government of
India’s decisive package to restore the health of the Indian banking system is in the view of the
[RBI] a monumental step forward in safeguarding the country’s economic future.”

URJIT PATEL’S DECISION ON KEY INDICATORS
REPO RATE
INFLATION RATE

ECONOMIC GROWTH
Despite the numbers tapering off slightly, the RBI believes India’s growth story is on the right
track. It believes the economy will grow by 7.4% this financial year and by up to 7.3% between
October and March. Decline in crude oil prices and rising private consumption are seen as
tailwinds.

RESEARCH METHODOLOGY
The aim of this study is to assess the comparative study between the two RBI governor’s
Raghuram Rajan and Urjit Patel.
Being an explanatory research, it is based on secondary data of journals, articles,
newspapers and magazines. Considering the objectives of study descriptive type
research design is adopted to have more accuracy and rigorous analysis of research
study. The accessible secondary data is intensively used for research study.
Secondary data refers to data which is collected by someone who is someone other than the user.
Common sources of secondary data for social science include censuses, information collected by
government departments, organizational records anddata that was originally collected for other
research purposes.

DATA ANALYSIS & INTERPRETATION
 GDP DURING BOTH THE TENURES
As the GDP has shown significant growth during Urjit Patel’s

tenure between 2016-2018 . There is slight high variations also
during Raghuram Rajan’s tenure.
 INFLATION RATES DURING BOTH THE TENURES
Rajan was successful in bringing the 13 pointer inflation rate

to 8% low in his tenure . The inflation rate did not saw much
fluctuations during Urjit Patel’s tenure

 INDIAN CURRENCY AGAINST DOLLAR
The Rupee against USD has significantly gained reaching the

70’s mark during the Urjit Patel tenure, while it showed less
fluctuation while Rajan’s tenure.
 Foreign Direct Investment
The FDI saw a high investment flow during 2017 as the Indian
markets were retuned to normalcy during Urjit Patel’s tenure

 GROSS NPA’s OF PRIVATE BANKS
Year Assets HDFC AXIS ICICI YES
Year 2018 Advances 464,593.96 338,773.72 435,263.94 98,209.93
Gross NPA 4,392.83 6,087.51 26,221.25 748.96
Year 2016 Advances 365,495.03 281,083.03 387,522.07 75,549.82
Gross NPA 3,438.38 4,110.19 15,094.69 313.40
Year 2014 Advances 303,000.03 230,066.76 338,702.65 55,632.96
Gross NPA 2,989.28 3,146.41 10,505.84 174.93
Year 2013 Advances 239,720 196,965.96 290,249.44 46,999.57
Gross NPA 2,334.64 2,393.42 9,607.75 94.32
Year 2012 Advances 195,420 169,759.54 253,727.66 37,988.64
Gross NPA 1,999.39 1,806.30 9,475.33 83.86
Figures in Rs Crores

 GROSS NPA’s of PUBLIC BANKS
Bank of Canara
Year Assets SBI PNB
Baroda Bank
Year 2018 Advances 1,463,700.42 412,325.80 383,770.18 324,714.82
Gross NPA 98,172.80 55,818.33 40,521.04 31,637.83
Year 2016 Advances 1,300,026.39 380,534.4 428,065.14 330,035.51
Gross NPA 56,725.00 25,694.86 16,261.44 13,039.96
Year 2014 Advances 1,209,828.72 349,269.13 397,005.81 301,067.48
Gross NPA 61,605.00 18,880.06 11,875.90 7,570.21
Year 2013 Advances 1,045,616.55 308,725.21 328,185.76 242,176.62
Gross NPA 51,189.39 13,465.79 7,982.58 6,260.16
Year 2012 Advances 867,578.89 293,774.76 287,377.29 232,489.82
Gross NPA 39,676.46 8,719.62 4,464.75 4,031.75
Figures in crores
The NPA’ both in public & private banks has significantly grown
From 2013 to 2016.

CONCLUSION
Raghuram Rajan’s departure as the Reserve Bank of India Governor was a shocker for
India and raised confusion and doubts on the intentions of political play but the stepping in of the
new chief is even more of a buzz. Patel is Kenyan born and holds degrees from London School
of Economics, University of Oxford and Yale University.
Patel defeated the other contenders for the post that included ex-governor Rakesh Mohan, ex-
deputy Subir Gokarn and State Bank of India chairperson Arundhati Bhattacharya. It is worth
noting that Patel worked at the International Monetary Fund for five years and was appointed
deputy governor of Reserve Bank of India in 2013.
Similarities
1. Continuity: Only if we could overlook the outward charisma and the celebrity status that has
been given to Raghuram Rajan and rightfully so, we could see that Patel is going to be all about
the continuity of the same policies that Rajan initiated. His insight into fighting inflation is
shared wholeheartedly by the successor who is most likely to continue the good work. That
should be all that matters.
2. Foreign degrees: Rajan’s suspension came with accusations of him being the man who
doesn’t know much of Indian economy and that his foreign degrees and work experiences have
made him less sensible of India’s need of the hour. It would be interesting to see how haters are
going to handle the same credentials of the new chief.
3. Similar stand: It is being said that Patel had a great role in designing the inflation-targeting
regime which makes it easier to understand that they are not so different after all and that there is
hope that the new governor will take a stance against all the odds that lie ahead. It will be
interesting to see how he manages to cut down inflation rate which is at 6% but the government
is not going to be happy until it is down to 4%.
4. Similar approach: His approach on RBI’s monetary policy from focus of wholesale price

(WPI inflation) to consumer price (CPI inflation) has been lauded by Raghuram Rajan which
shows they are on the same page. He will be seen continuing with the smart decisions that
witnessed alongside Rajan when he was the deputy governor, taking over responsibilities when
the former was outside India.
Differences:
1. Rock star v/s Taciturn: Rajan has always been popular for his eloquence and charisma that
he aptly used to stress upon the economical need of the country. His not so friendly ties with the
government and open battles make him the rock star RBI governor while the new guy is a tamed
low-key banker who would do better than to risk losing the favor of the ruling government.
2. The torch bearer v/s The follower: It is not being predicted that Patel will try to divert or
change the monetary policies that were initiated by Rajan. It is more likely that they will be kept
intact. What makes these two gentlemen differ is their contribution. While Rajan will always be
the torch bearer who took the bold steps to bring in transformation, Patel will always be the
follower who kept up the good work started by Rajan.
3. Hawk v/s Dove: Economic history of India shall always remember Raghuram Rajan as the
hawk who took the courage to stand for what everyone else doubted. He is the man who took the
big risk upon his reputation while implementing the policies. Patel, though respected by
everyone, is the silent dove, a man of few words.
4. Rewarding silence: Patel’s silence could reward him in times to come if his appointment is
apolitical and he manages to keep his peace with those in power. His silence and taciturn could
go a long way in giving him a rather more secure job promise. He won’t be doing all the talking
and his focus will be on his research.
Atlast ; both the governors formed well at their full capabilities and had given
their best to the Indian economy which today stands 6th in the world.

BIBLIOGRAPHY
 I Do What I Do – Raghuram Rajan (Book)

 Fault Lines : How Hidden Fractures still threaten the World Economy – Raghuram Rajan
(Book)
 The Third Pillar : How Markets and the state leave the community behind (Book)
 The HINDU newspaper (Editorials)
 https://qz.com/india/1586631/reserve-bank-of-india-cuts-repo-rate-as-inflation-builds-up/
 RBI’s website (www.rbi.org.in)
 https://www.kansascityfed.org/publicat/sympos/2005/pdf/rajan2005.pdf
 https://tradingeconomics.com/india/indicators

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A PROJECT REPORT ON

RBI DURING THE TENURE OF RAGHURAM RAJAN & URJIT

T.Y.B.M.S [SEMESTER VI]

Prof. SOUMIK CHATTAPADHYAY

ACADEMIC YEAR “2018- 2019”

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 1

This is to certify that Mr. SAHIL DEEPAK SURVE

Roll No. 41655

The project was completed successfully under the guidance of

This is bonafide project. The said work and information presented in

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 2

I, Mr./ SAHIL DEEPAK SURVE

of MSG-SGKM College of Arts, Science & Commerce, studying in

The information submitted herein is true and original to the best of my

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 3

I have a great pleasure in preparing my project report on “RBI

I am highly indebted to our honourable principal who took keen interest

I would like to thank our seniors, librarians who sincerely helped me

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 4

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 5

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 6

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 7

1st wave of nationalization (1969)

 Central Bank of India

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 8

2nd wave of nationalization (1980)

 Oriental Bank of India

In 1991 , as rupee lost 18% against dollar. For this the

Narshiman committee I was formed. It recommended

IDBI , INDUS bank were given lisence in 1 st stage.

5. The Non-Banking Financial Company Framework was formed.

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 9

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 10

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 11

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 12

About Basel norms

Basel is a city in Switzerland which is also the headquarters of Bureau of International

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 13

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 14

In 2004, Basel II guidelines were published by BCBS, which were considered

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 15

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 16

Implementation of Basel III norms in India

The RBI has postponed the implementation of these norms to 2019.

1.Higher capital requirement for banks –

2. More technology deployment –

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 17

The way ahead for the banks

In this regard the following strategies need to be adopted:

1. Change in Business Mix –

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 18

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 19

1. Guidelines on operational aspects of implementation of the Countercyclical Capital Buffer.

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 20

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 21

Raghuram G Rajan is a professor of finance in the Univeristy of Chicago. He was the

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 22

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 23

Months after the collapse of the Lehman Brothers, Greenspan admitted at a

MSG SGKM COLLEGE OF ARTS , SCIENCE & COMMERCE Page 24

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(Rajan’s paper on Global Recession in 2003)